Church Water-Tax Case

Tax or Fee?

Since March of 2018, the city of Magnolia, Texas has been trying to circumvent the law by raising the water bill for local churches and non-profits. This city has been charging churches and non-profit at a significantly higher rate for water and wastewater than rates paid by businesses and residents. Why?

Mayor Todd Kana and the Magnolia City Council decided that despite Texas’s recognition of the value churches provide to their community, these churches were not paying their “fair share” in taxes. They voted to revise the city’s fee schedule for water services, creating an expensive “institutional” fee charged only to churches, schools and other nonprofit organizations because those entities are exempt from paying property taxes.

In the words of Magnolia City Administrator Paul Mendes: “Implementing an institutional rate would allow the city to collect funds from these entities in place of taxes or other fees.”

“Texas law clearly exempts religious and non-profit organizations from taxation,” said Mike Berry, Chief of Staff for First Liberty.  “Magnolia’s water fee scheme hinders these churches from providing many vital services to the community because of the government’s unquenchable thirst for taxpayer money. These churches offer a multitude of services to their communities, and over-charging their water limits the services they can provide the community.”

Legal Action

That’s why First Liberty Institute and the law firm Baker Botts filed a lawsuit against Magnolia arguing that its water fee scheme is illegal under Texas law.

Magnolia is one of a growing number of localities that have enacted discriminatory fees against churches and other nonprofits because, in the government’s view, they don’t “pay their fair share.” However, recent studies have indicated that the average church in an urban environment generates over $1.7 million annually in economic impact. As it turns out, what churches and non-profits don’t give in taxes, they give in service. In recognition of these benefits, every state exempts some or all of the properties owned by charitable nonprofits from property taxes.

However, these discriminatory fees actually inhibit the generosity of these organizations. A recent study conducted by the National Bureau of Economic Research shows that taxes on nonprofits actually discourage nonprofit activity. This means that churches and non-profits who would normally give to homeless shelters, rehab facilities, and more cannot, because they can’t even pay the bills.

Denied Due Process

Unbeknownst to the churches, as they continued to challenge the water fee scheme locally, in November of 2018, city officials quietly sought approval for Magnolia’s water fee scheme several hours away from Magnolia in an Austin courtroom.  Only when the churches sued Magnolia in May of 2019 did they learn that Magnolia’s efforts in Austin now prevented them from challenging the water fee scheme.  In response to the churches’ lawsuit, Magnolia officials threatened sanctions against the pastors if they continued.

“There was no question that Magnolia’s city leaders knew these churches wanted to challenge the city’s water fee scheme,” said Jeremy Dys, Special Counsel for Litigation and Communications for First Liberty Institute. “The churches attended multiple public hearings, sent letters, sought a legislative fix, and even provided written notice that they were going to sue. And, still, city leaders denied these churches a fair opportunity to challenge the water fee scheme by seeking approval from a court several hours away.”

In August of 2019, attorneys with First Liberty convinced the Austin-based court that previously validated Magnolia’s water fee scheme to re-open the proceedings concerning the legitimacy of the rate increase, finding that city officials should have known that the churches were an interested party, and failed to involve them in the rate increase discussion. Then, in March of 2020, First Liberty Institute and its network attorneys with the law firm Baker Botts defended the churches on appeal before the Texas Third District Court of Appeals in Austin against efforts by the City of Magnolia to impose a water fee scheme on tax-exempt churches without due process.

In December 2020, the Texas Third District Court of Appeals in Austin affirmed the lower court decision granting a new trial for three churches.

Settlement Reached

Then, in December 2021, attorneys with First Liberty Institute and the law firm Baker Botts representing churches in Magnolia, Texas announced that the City of Magnolia, Texas approved an agreement requiring the City to reclassify its water rate structure and treat “all religious organizations, religious non-profits, churches, or houses of worship” equally with commercial businesses.  In exchange, the churches represented in the petition, Magnolia Bible Church, Magnolia’s First Baptist Church, and Believers Fellowship, have agreed to dismiss their lawsuit challenging the constitutionality of the city’s existing water rate scheme.

“Churches and non-profits provide a multitude of services to their communities, particularly for the most vulnerable,” said Aaron Streett, Partner at Baker Botts, “This joint agreement will allow both the city and all the religious organizations of Magnolia to build a stronger community.”

“Our clients are thrilled that, because of this agreement, they can turn to what they do best: care for their community in partnership with the City,” said Jeremy Dys, Special Counsel for Litigation and Communications for First Liberty.

The agreement follows nearly three years of litigation over whether the City of Magnolia’s rate structure lawfully treated religious organizations, including churches, less favorably than for-profit businesses.

“We are grateful that churches and all religious organizations in Magnolia will now be treated equally along with area businesses by the City of Magnolia,” said Dr. Steve Burrell, Senior Pastor of Magnolia Bible Church.  “We are eager to work with the City Council to continue to improve the lives of our friends and neighbors.”